Why Jeff Bezos feels no pain...

Dec 4, 2014

New York, New York

Dear Diary,

In the news: Amazon has raised $6 billion in additional financing. Investors readily throw their money into the River of No Returns. At only 100 basis points over Treasury borrowing costs, they worry neither about the return on their money, nor the return of their money.

Over on the equity side, investors are even more sans soucis. Nasdaq shows Amazon with a p/e of MINUS 714. After 20 years, the giant marketer has never learned to make a profit. The last quarterly report showed it with losses of about $1 a share, or about $2.50 on every hundred dollars of sales.

Fortune Magazine:

    Amazon's Fire phone, dubbed a "shopping machine," is a flop. The device, which the company introduced in June, led to a $170 million write-down last quarter and a lowered sticker price of just 99 cents. Tom Szkutak, the company's chief technology officer, told Fortune in October that the phone was "priced wrong."

    "I've made billions of dollars of failures at Amazon.com,"[ Bezos] said. "Literally billions. ...Companies that don't embrace failure and continue to experiment eventually get in the desperate position..."

    Some of Bezos' billion-dollar mistakes include a site for auctions, which didn't work. That effort evolved into something called zShops, which also failed. The idea eventually evolved into Amazon Marketplace, which now represents 40% of Amazon's unit sales, Bezos said.

So generous and undemanding are investors that Jeff Bezos feels no pain from his many failures. Every flop and failure makes him richer. He learns nothing.

Nothing succeeds like failure. But only if it hurt. A painful failure is worth far more than an agreeable success. No one can possibly know what will 'work' in business. Instead, we improvise. We try things. We ad lib. And most of what we do is embarrassing and unproductive. But what is left after you've shucked off all the many failures? Success!

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Likewise, in your personal life, a strike-out is more valuable than a home run. A man strikes up a conversation with a good looking woman at a bar. She turns away, with a yawn. Next time, he will not try to talk about Japan's trade deficit! But suppose the desperate girl had feigned an interest; he might have married to her, and spent the next 4 decades regretting it.

Another example: Japan. Over the last 20 years, Japan has spent trillions trying to revive its economy. It invented ZIRP (zero interest rate policy) and QE (quantitative easing) to do so. And it took its government debt/GDP ratio from a comfortable 60% to a crushing 235%.

These efforts were huge flops; nominal GDP has gone nowhere in 23 years. (GDP adjusted for deflation is slightly ahead, but since the stated purpose of the programs was to eliminate deflation, Japanese policymakers should hardly get credit for it). Government deficits are still running at 8% of GDP...

And with the population in decline, it is almost impossible for economic growth to ever keep up with debt growth.

No country since the beginning of the industrial revolution in the 18th century...or since the beginning of the welfare state in the 19th century...or the beginning of the credit expansion in 1949...or since the advent of the US dollar managed currency system in 1968...

...has ever faced such a challenge. And everything Japan has done over the last 25 years to meet it has failed.

But where's the pain? There is none. Ah, there's the problem. No pain, no gain. Nothing is learned. Nothing is changed. The government has benefited from more spending without raising taxes. The corporate sector has benefited from bailouts and cheap loans. The household sector has benefited from low prices.

What do you learn from that? Nothing. You just keep doing what doesn't work. Like Jeff Bezos, you keep raising money and spending it...decades go by and you wonder why it doesn't work.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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